Ficci optimistic over fiscal deficit target for FY13

Industry chamber Ficci on Monday gave credit to the Centre for managing its finances better this year than last year, even as fiscal deficit touched 51.5 per cent of the Budget estimates for 2012-13 in just the first four months.

Ficci, or the Federation of Indian Chambers of Commerce and Industry, said the Budget target of reining in the deficit at 5.1 per cent of GDP would be within reach if basic things were done right.

The basic things, according to Ficci, are mopping up over Rs 30,000 crore from disinvestment, allowing the Employees' Provident Fund Organisation to invest 10 per cent of its funds in the equity markets and restoring the cut in Customs duty on crude oil.

“Despite all the hullabaloo regarding the worsening fiscal situation, and fiscal deficit till July this year already at 51.5 per cent of the budgeted deficit, we still can expect some respite,” the chamber said in its report on economy.

The chamber’s analysis came at a time when the 13th Finance Commission Chairman Vijay Kelkar and two members have already submitted their report on fiscal consolidation to Finance Minister P Chidambaram.

Also, all eyes are on rating agencies Standard & Poor’s and Fitch in case fiscal deficit worsens. Ficci said not many are aware that the government has managed its finances better this year. “A clear indication of this is that the government has not breached the Ways, Means and Advance (WMA) limit set by the RBI (the Reserve Bank) even once and the borrowings have also been within comfortable limits,” it added.

Last year, the government had breached the WMA limit several times and also took recourse to issuance of cash management bills (Rs 40,000 crore). The government was able to better manage its finances because its net tax revenues improved to 18.6 per cent of the Budget estimates in the first four months of current financial year, higher than 17.2 per cent a year ago.

As far as expenditure was concerned, growth in non-plan expenditure at 24 per cent, particularly revenue expenditure, remained uncontrolled.

This was the biggest risk to fiscal consolidation.

Plan expenditure almost remained flat at two per cent. However, the plan capital expenditure grew at 47 per cent, with plan revenue expenditure declining by four per cent.

The growth in plan capital expenditure is welcome, given the government’s grandiose plans of reviving the investment climate by stimulating capital expenditure.

“We, however, believe that the budgeted fiscal deficit target could still be not difficult to achieve if we are able to bite the bullet on some major subsidies,” it added.

Faced with an incremental addition at 0.3 per cent of GDP to fiscal deficit (1.1 per cent slippage to be met through 0.8 per cent additional borrowings), it may be noted that the Budget has already an in-built provision of an additional 0.3 per cent into the fiscal deficit estimates with cash balances carried forward to fund the fiscal deficit (Rs 34,000 crore) from last fiscal.

This leaves with an additional resource mobilisation target of 0.8 per cent of GDP.

These could be achieved with a little bit of effort. The government could easily mobilise disinvestment proceeds in excess of the budgeted Rs 30,000 crore.

The government could encourage the EPFO to invest out 10 per cent of its holdings in equities.

“This would improve the market sentiment and facilitate disinvestment.”

Secondly, the government can resort to a possible cut in plan expenditure.

Finally, it can go for the much-awaited increase in diesel prices. In this context, even if the government just restores the cut in duties on crude products to the June 2011 levels, it could mobilise an additional Rs 30,000 crore in the remainder of this fiscal.

According to conservative estimates, all such measures may add up to 0.7 per cent of GDP, leaving a gap of only 0.1 per cent.